Shanghai Street View: Wealth Explosion

My first hint that something big was on the way came late last year when one of my younger friends, a 20-something and frequent job hopper, called to tell me he’d just changed jobs again. After all, this was the friend who first told me about WeChat back in 2011, the same year the service launched and well before most people had heard of the mobile messaging service that would later take China by storm.

My friend had previously worked at a wide range of jobs, from selling stored value cards to managing a yoga studio, so I was curious to hear where he’d landed next. I was somewhat disappointed to learn that he was now working for a wealth management company that his friend had recently opened, as that kind of company didn’t sound all that exciting. Never mind that he didn’t have any experience in the financial services industry.

Fast forward to the present, when wealth management shops have suddenly become the latest hot trend in Shanghai. In the last two months alone, at least three such shops have opened up in my neighborhood, often in spaces that were vacant for years or inhabited by struggling businesses. And my neighborhood in Hongkou District is quite ordinary, which means Shanghai’s trendier areas have undoubtedly been hit by the same scourge of wealth management shops.

More broadly, this sudden explosion looks a lot like the kind of boom-bust pattern you often see in China, be it in our stock markets or the latest business trends. On the retail scene, I’ve written about similar booms in convenience stores and coffee shops, which both occurred quite rapidly and created huge supply gluts.

For anyone who doesn’t have enough wealth to worry about such things, I should quickly describe exactly what these wealth management shops do. They sell investment products to anyone wealthy enough and looking for better return rates than they can get from traditional bank savings accounts.

Most of these high-yield products are backed by assets like real estate or coal mines, which can produce income to pay back investors at the advertised return rates. Of course, few people actually bother to ask what is backing their investment when they buy these products, and most are simply happy to get their regular payments. But that’s a topic for another day.

Returning to my original story, much has happened since my friend first went to the small wealth management shop last year. Not surprisingly, he left the job after just a few months and went to work for another, much larger wealth management company. I know this because he called up asking if I wanted to invest with them.

But my young friend wasn’t the only one who wanted to help me get more for my money. An older friend who likes playing the stock market has also encouraged me to look into these investment products, many of which have smartphone apps that can show an investor just how much money has been earned in real time.

Then there are the three wealth management shops that have opened near me. One moved into a seedy old massage parlor that always seemed a bit dubious and was frequently changing owners. The second moved into a candy shop not far away, which also seemed empty most of the time. The third opened in a space that has never been filled in a new nearby apartment building that has been on the market for more than a year.

This sudden explosion seems quite excessive, and I sincerely doubt the market needs so many advisors to tell us how to beat the banks. For a glimpse at what’s likely to happen, we can look at the convenience store explosion that happened about four years ago when Japanese chains Lawson and FamilyMart and U.S. chain 7-Eleven opened hundreds of new stores in a very short time in Shanghai.

That boom culminated with four separate stores openings at a relatively low-key intersection near my home, including all the big chains and a local one. Three years later, only two shops remain on the corner, and I suspect that a similar ratio of closures has occurred throughout Shanghai.

I also chronicled the coffee shop explosion in a recent blog post, and suspect many of those stores will also close in the next two years. Unlike coffee shops and convenience stores, wealth management companies aren’t really the type of shop that I would ever visit, which is one reason I was disappointed to see three open near me so rapidly. Perhaps one or two more will open nearby in this latest retailing trend, only to be followed by the closure of many in the latest of boom-bust cycles in China’s book.